Hard Money vs Private Lender Loans Explained

Hard money and private lending are two types of non-traditional loan options for borrowers that can’t get or don’t want to borrow from traditional lenders. A hard money lender is a professional lender that’s not a bank or credit union, and a private lender is someone who you know. 

Working with both types of lenders has its pros and cons. For example, a hard money loan tends to be more limited in scope than a private loan. However, if your need for a loan falls within the criteria for a hard money loan, you may prefer a hard money loan vs private lender financing. 

Both lenders have lower barriers to borrowing, but the hard money lender is licensed and has to follow lending laws for its loan programs. In contrast, a private lender is under no obligation to follow lending laws.

You should always carefully consider the purpose of the loan along with the type of loan you’re interested in obtaining. 

The following is a look at a hard money loan vs private lender loans, and the kind of experience you’re likely to have when looking to obtain either type. 

Why is choosing hard money vs. private lender loans important?

As you look into hard money vs a private lender for funding, you won’t see a lot of difference between the two at first glance. Both have the same type of repayment terms and requirements set by the lender and function much the same way as a traditional loan. The major difference between the two types comes down to the entity that’s behind the lending.

A private lender is someone who lends money, but doesn’t have a license for organized lending. No laws expressly forbid people from loaning money, and a private lender can charge whatever interest they like on a loan. There are some benefits to private money vs hard money when it comes to getting a loan, but private lenders tend to be people you have a personal relationship with.

A hard money lender is licensed and therefore has to follow regulations that govern the lending of money. You gain access to consumer protection that doesn’t exist with a private money lender. As you look at a hard money lender vs a private lender, you’ll find the hard money lender offers fair and equitable loan products along with a professional distance to prevent hard feelings from taking hold. 

What is a hard money loan?

A hard money loan is a loan that uses an asset or assets to secure the loan as opposed to using a credit score for underwriting. 

The word ‘hard’ in this instance refers to the fact the loan is being funded with the backing of a “hard asset.” Most borrowers pledge their home or property as security, but other assets are sometimes considered. 

This type of loan is an alternative to traditional forms of lending due to the fact there’s a lower barrier to qualifying for funding and is usually quickly funded. 

Hard money loan pros

To help you figure out if a hard money loan is right for you, let’s look at some of its advantages.

Lenders are semi-institutional

Hard money lenders are organized in that they function similarly to traditional lenders. When you apply for a hard money loan, you speak to lending experts who guide you through the process and explain the lending terms to you.

Licensed for real estate lending

Most hard money loan borrowers are in the real estate construction industries. They need to borrow large sums against their properties, then repay the loan once the project is finished. Hard money lenders are licensed to lend money for this and related purposes. 

Loans close faster

A hard money loan doesn’t use the borrower’s credit score and income to underwrite the loan. Instead, it uses the value of the property that the borrower is pledging to secure the loan. That means less time is spent on determining the ability of the borrower to repay the loan, which results in faster funding. 

Hard money cons

Before applying for a hard money loan, you should also weigh the disadvantages and make sure it’s still the right fit for you.

Higher interest rates and fees

Hard money loans have a lower threshold for qualifying and a higher risk of default as a general rule. The lender charges higher origination fees and interest rates to hedge against a default by the borrower. 

Short repayment periods

A hard money loan is intended to provide a fast infusion of resources to buy an asset for short-term ownership. The repayment period can be as short as six months and as long as 12 months. Some hard money loans can last for as long as five years, but this is rare. In these cases, there has to be an understanding between the lender and borrower as to why this much time is needed for repayment. 

Limited to specific borrowing needs

The purpose of a hard money loan is to help a borrower gain access to financial resources that enable them to buy property fast, flip a house, start a construction project, or own valuable assets and have poor credit. It can also be used as a bridge loan to help a borrower make it through a period of time where they have no money coming in, but are guaranteed payment in the near future. 

Loans max out at around 80% of the value of the asset

You won’t be able to get 100% funding against the value of your asset, and you are required to provide a down payment. A hard money lender tends to loan no more than 80% of the value of the asset in order to preserve some of its equity. 

What is a private money loan?

A private lender is a standalone operation or an individual who is willing to loan money with typical repayment terms. That is, the lender isn’t affiliated with a bank or credit union. They lend money in the same way as a public entity, but a private lender is more likely to work with borrowers who have less than perfect credit. 

The major difference between private vs hard money lending comes down to the fact that a private lender is typically someone you know.

Private lender pros

As with a hard money loan, a private loan has advantages you should evaluate as you decide what kind of loan you want.

No credit check

A private lender usually relies on their trust in you and a handshake to underwrite the loan. They don’t run a credit check to determine your ability to repay. 

Doesn’t require collateral

One of the major differences between private money vs hard money lending is how private loans don’t require collateral. A private lender won’t ask for collateral to secure the loan, while the hard money lender is using the value of the property to lend to you. 

Easy to obtain

A private lender won’t ask you to fill out paperwork and sign on multiple lines to get the money you’re seeking. They may have a simple contract written out that outlines basic terms such as repayment and interest, but that’s about it. 

Private lender cons

Might not follow lending laws

A private lender isn’t beholden to federal lending laws. Therefore, they can put their own terms on the loan that you have to abide by, regardless of how fair or unfair they are. You’re under no obligation to take the money that’s offered, but if you’re out of other options, you’ll have to accept unfair terms. 

Are typically from someone you know

Friends and family are inclined to help each other out, but borrowing money from someone you know can lead to hard feelings if you fail to repay the loan. If you prefer to maintain your relationship and avoid the risk of something going wrong with your ability to pay the loan, don’t ask for help from a private lender. 

Might not negotiate a grace period for repayment

Private lenders are loaning money out of their own pocket. If your plans to repay don’t go as intended, your lender may not be willing to renegotiate payment terms. This can lead to a demand for payment of the loan in full and the potential for legal action by the private lender. 

The informal nature of getting a loan may harm you later

In the event the private lender doesn’t draw up a contract, you can be held liable for what you owe in court. The lack of a written contract or repayment terms means both of you have to keep track of the loan balance, interest paid, and how many payments were made. If one of you fails to keep track and a dispute occurs, the private lender can take you to court and ask a judge to settle the matter. 

How to decide which loan is right for you

Before you approach a private or hard money lender, you should identify the reason why you need funding. 

The hard money lender is an excellent resource for times when you need money fast to take advantage of a profitable opportunity, and you can’t get funding from a bank. 

A private loan involves asking someone you know, such as a family member or friend, for money. Going this route runs the risk of ruining your relationship with the lender and can open you up to unpleasant consequences. 

At Source Capital, we offer hard money loans to help borrowers get access to financial resources quickly and with the least amount of hassle. We’re here to help our clients get funding when they’re unable to get other forms of financing. Our loan experts take the time to explain how a hard money loan works, why it could be a good idea to get one, and help you find the right kind of loan. 

We’ve helped thousands of clients get a hard money loan, and we’re here to do the same for you. Check out our page of testimonials from satisfied clients to learn more about why you should choose us for your hard money lending needs.

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